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Details of New House & Senate Revenue Packages

andyn — 2010-03-21T19:08:00Z

On Saturday, a new package of revenue enhancements was approved on the floor of the Washington State House of Representatives. This latest revenue proposal comes one day after the State Senate passed a slightly different revenue package.

Both proposals would apply a temporary surcharge on certain business services and would repeal or restrict a number of costly tax exemptions and preferences. But the Senate's package includes a temporary 0.2 percentage point increase in the state sales tax, which is not part of the House version. And unlike the Senate proposal, the latest House proposal would limit large preferences for banks and custom software. In total, the current House package would raise about $788 million in new revenues needed to preserve fundamental public priorities while the economy recovers. The Senate package would generate about $819 million in additional resources.

The two packages have following elements in common:

A B&O tax surcharge on business services (House = $201 million, Senate = $160 million): Both proposal would apply a temporary 0.25 percent surcharge on most businesses that currently pay the 1.5 percent "Service and Other Activities" B&O tax rate. Under both proposals, public and nonprofit hospitals along with research and development firms would be exempt from the surcharge. The surcharge would take effect on July 1, 2010 under the Senate proposal. It would take effect on May1, 2010 under the House version.
Direct sellers exemption ("Dot Foods") ($155 million): A recent ruling from the State Supreme Court greatly expanded a B&O exemption originally intended to apply only to businesses such as Avon and Mary Kay that sell products exclusively through door-to-door sales persons or in-home parties. Both measures would repeal and retroactively clarify this exemption.
Increasing taxes on cigarettes and tobacco products (House = $109 million, Senate = $92 million).
Adopting "economic nexus" (House = $84 million, Senate = $72 million): Under current law, numerous multistate businesses are not required to pay B&O taxes on their activities conducted in Washington State. Economic Nexus would create a more level playing field between in-state and out-of-state businesses, requiring some out-of-state firms to pay B&O taxes on transactions occurring in Washington. For more information, click here.
Extending the sales tax to bottled water (House = $38 million, Senate = $35 million).
Eliminating, restricting, or altering the following business tax preferences: The Convention Center sales tax credit (House = $10 million, Senate = $20 million); a B&O tax preference for manufacturing certain agricultural products (House = $4.8 million, Senate = $4.1 million); a B&O preference for corporate directors (Both = $2.1 million); a sales tax preference on livestock nutrient equipment and facilities (House = $1.6 million, Senate = $1.3 million); clarifing the PUD privilege tax (House = $1.2 million, Senate = $1.1 million); and a B&O exemption for property management salaries (House = $8.3 million, Senate = $7.2 million).

Differences between the curret House and Senate approaches include:

A temporary (3-year) sales tax increase (Senate = $224 million): The current senate package would increase the state sales tax rate by 0.2 percentage points to 6.7 from 6.5 percent. The increase would be in effect until June 30, 2013. The House plan does not include a sales tax increase.
Repealing the sales tax exemption on custom software (House = $77 million): The current house proposal would extend the sales tax to purchases of custom software. Currently, 11 states tax custom software under the sales tax. The Senate's proposal does not include this action.
Limiting the "first mortgage deduction" (House = $50.7 million): The House proposal would cap a costly deduction claimed by banks on interest earnings from first home mortgage loans. The current proposal would cap the deduction at $120 million, which would ensure that local community banks are held harmless. (The previous House revenue proposal would have capped the deduction at $100 million.) The current Senate proposal does not include a limitation on the first mortgage deduction. For more information on this deduction, click here.
Repealing the nonresident sales tax exemption (House = $42 million): Under current law, visiting shoppers from other states or Canadian provinces that have sales tax rates of 3 percent or lower are exempt from paying Washington's sales tax. The current House revenue package would eliminate this exemption; the Senate version would not.
Restricting abusive tax avoidance transactions (Senate = $12.3 million): The current Senate proposal includes a measure that would make it more difficult for firms to engage in tax avoidance activities. Earlier versions of the House proposal included this item as well. The current House proposal does not include it, however.
Modifying and increasing the Aircraft Excise Tax (House = $4.0 million): The current house proposal would increase the aircraft excise tax and create a new category for large multiengine turbojet aircraft. Under current law, the aircraft excise tax is series of fees assessed on personal aircraft, depending on the size and type of aircraft. This fee structure has not been altered in decades. The House proposal would create a new fee structure that differentiates private aircraft according to their size, type, and year they were built. Small aircraft built before 1970 would see the smallest fee increases while newer aircraft would experience slightly larger increases. Finally, a new category is created for multiengine turbojet aircraft (i.e. Lear Jets); these aircraft would be assessed considerably larger fees compared to small, single-engine aircraft.
Smaller Senate-only measures ($27 million): Limitations on smaller tax exemptions and preferences found in the current Senate proposal include: Repealing the sales tax exemption on coal used in thermal electricity generation facilities ($11 million); eliminating an exemption on machinery used to create electricity from wind ($8 million); ending a Real Estate Excise Tax (REET) exemption on foreclosed properties ($6 million); limiting a B&O deduction on bad debts ($2 million); and eliminating a B&O deduction for fees and dues paid to certain nonprofit organizations ($1 million).

State Senate Passes Updated Revenue Package

andyn — 2010-03-20T03:33:04Z

Earlier today, members of the State Senate approved a package of needed revenue enhancements to help ease the recession's impact on our state budget. The latest Senate revenue proposal would generate about $800 million in new resources to help maintain vital supports for working families like child care support, worker retraining programs, health care, K-12 and higher education, along with other basic services.

The current Senate package largely builds from proposals introduced earlier this year. Elements of the Senate's approach include: eliminating or restricting wasteful tax exemptions, preferences, and loopholes; applying a temporary B&O tax surcharge on certain business services while permanently doubling the small business tax credit; temporarily increasing the state sales tax rate; and implementing the Working Families Tax Rebate (WFTR) -- a rebate program based on the Federal EITC.

The revenue package passed today also incorporates these elements, however it varies from earlier Senate proposals in several respects:

Smaller temporary sales tax Increase: Earlier versions of the Senate revenue package include a 0.3 percentage point increase in the state sale tax. The latest version would increase the sales tax by 0.2 percentage points to 6.7 from 6.5 percent. If enacted, this increase will be in place for three years, ending on June 30, 2013.
Fewer businesses subject to the B&O tax surcharge: Under previous Senate revenue proposals, a temporary 0.25 percent surcharge would have been levied on every business that is currently subject to the 1.5 percent "Service & Other Activities" B&O tax rate. The latest version would exempt public and nonprofit hospitals, research and development firms, and real estate agents from the surcharge.
Delayed implementation of the Working Families Tax Rebate (WFTR): In the previous Senate revenue package, eligible families would have started receiving WFTR rebates in 2011. Under the current version, implementation of the WFTR would be delayed until 2012. In that year eligible families would receive a rebate amounting to five percent of the federal EITC, with a minimum rebate of $25. In subsequent years, families would receive rebates equal to 10 percent of the EITC, and the minimum rebate would be $50. For more information about the WFTR, click here.

The schmudget post "Comparison of Revenue Proposals" provides a side-by-side comparison of the previous Senate revenue proposal, the current House proposal, and the Governor's revenue proposal.

Custom Software Taxed in 11 States

andyn — 2010-03-17T15:29:34Z

On March 9th, the House approved a package of revenue enhancements needed to maintain core public services like health care and education. The House package includes a measure that would broaden the sales tax to include purchases of customized software. Like many of the other tax increases proposed by state policymakers, this has already been done in other states; according to CCH Incorporated, 11 states and the District of Columbia currently levy sales taxes on custom software.

Under current law, sales of prewritten or “canned” software are subject to the state sales tax while sales of custom software are exempt. Prewritten software includes typical off-the-shelf products such as Microsoft Office, Windows, video games, and other mass marketed consumer software products. Custom software is not mass marketed or sold in retail stores. In its purest form, custom software is developed from scratch for use by a single user or business.

The current House proposal would extend the sales tax to custom software and to prewritten software that has been heavily customized for a specific user. If approved by the State Senate, this action would generate some $77 million in coming fiscal year and more than $180 million in the FY2011-13 biennium.

Based on the findings of a new analysis by the Center on Budget and Policy Priorities (CBPP), last week the Budget & Policy Center reported that many of the actions currently under consideration in Olympia have already been enacted in other states. Of the 33 states that have enacted tax increases to maintain services during the current downturn, 11 have restricted business tax preferences; five have enacted business tax surcharges; nine have eliminated sales tax exemptions; and eight have increased the sales tax rate – all of which are currently under consideration in Washington State. Click here to read our full summary.

Legislature considers limiting costly tax preference for banks

andyn — 2010-03-15T23:14:02Z

Lawmakers in Olympia are considering placing a limit on a B&O tax preference that primarily benefits large banks headquartered outside of Washington State.* Capping the “first mortgage deduction” would generate about $67 million in badly needed new resources, while leaving in place a sizable tax benefit for smaller local banks and mortgage lenders.

Since 1980, banks and mortgage lenders have been granted a B&O tax deduction for interest earned on investments tied to first home mortgage loans. This deduction costs Washington State taxpayers nearly $100 million in foregone revenue each year and has not been vigorously reviewed to ensure that it fulfills a valid public purpose.

This year, lawmakers are considering a measure that would scale back the first mortgage deduction in order to preserve essential services like health care and education. The current revenue package (SB 6143) under consideration in the Washington State House would place two limits on the deduction:

Fixing the “Homestreet Case”: The current proposal would clarify that the deduction only applies to interest earned on first home mortgage loans and first home mortgage-backed securities. A recent State Supreme Court ruling (Homestreet Inc. v. Washington State Department of Revenue) expanded the deduction to apply to previously unintended streams of business revenue, such as fees charged for servicing loans sold on secondary markets. If enacted, this clarification would save the state about $9 million in the current fiscal biennium.
Enacting a $100 million cap: The current legislation would place a reasonable limit of $100 million on the amount of interest earnings any bank or lender could deduct from their B&O tax liability each year. Under such a cap, small lenders and community banks (those with less than $100 million in interest earnings) would be held harmless. While large banks would no longer be able to deduct all of their interest earnings from first home mortgages, they would still be able to deduct a sizable portion – up to $100 million per year.

In total, clarifying and capping the home mortgage deduction as described above would generate some $67.1 million in the current biennium. Given the depth of the current economic crisis, Washingtonians cannot afford to squander scarce public resources on unnecessary tax exemptions, credits, preferential rates, or special deductions.

*After the recent demise of Washington Mutual last year, there are no longer any large banks headquartered in Washington State.

Current WA tax proposals enacted in many states, new report shows

andyn — 2010-03-12T18:02:13Z

A new report from the Center on Budget and Policy Priorities (CBPP) finds that at least 33 states have raised revenue to meet public needs in the present downturn. Many of the types of actions being considered by Washington State lawmakers have already been enacted other states.

As part of a balanced approach to our economic problems, lawmakers in Olympia are considering a range of responsible revenue enhancements needed to preserve essential services like health care, education, and child care while the economy recovers. Raising state taxes to maintain these services is a reasonable and economically sound approach that has been adopted by majorities of states in past recessions.

State tax increases in 2008 and 2009 have already generated some $30 billion in new resources to help close recession-induced budget shortfalls.

This year, lawmakers in Olympia have proposed to generate additional resources by eliminating a number of costly business and sales tax preferences. The study found other states have taken similar steps. The first table below shows that 11 states restricted business tax credits, deductions, and exemptions or have taken actions to reduce tax avoidance. Another five states -- Connecticut, Delaware, Nevada, North Carolina, and Oregon – have enacted business tax increases or surcharges. (Both the Washington State House and Senate revenue proposals include temporary B&O surcharges on a range of business services.)

Legislators in Olympia are also considering measures that would eliminate wasteful sales tax exemptions. The second table below shows that nine states have expanded their sales taxes to include previously untaxed products and services. Notably, two states (Tennessee and Wisconsin) extended the tax to certain types of software – an action that is included in the current House revenue package here in Washington.

The current revenue proposal in the Washington State Senate includes a temporary 0.3 percentage-point increase in the state sales tax. So far, the sales tax rate has been increased in eight states during the current downturn. California, Indiana, Massachusetts, and North Carolina increased the sales tax by one cent (1.0 percentage-point) or more. Even Nevada’s 0.35 percentage-point increase is larger than the current proposal in Washington State.

Finally, both the current House and Senate revenue proposals here in Washington include measures to increase the cigarette tax and taxes on other tobacco products. According to the CBPP report, 20 states increased tobacco taxes in 2008 or 2009.

To view the entire report, click here.

Make No Mistake--State Budget Will Shrink under Senate and House Proposals

jeffc — 2010-03-12T01:11:28Z

The headline in The Seattle Times "State spending on track to rise, despite budget cuts" is a misleading way of looking at the state budget situation. If you’ve been following the budget debate, you know that both the Senate and House budgets propose deep cuts to education, health care, economic security, and so on.

State spending – from money the state collects --would actually fall under the two budget proposals. The article adds anticipated federal aid to state spending in order to reach the conclusion that the budget would increase.

However one treats the federal aid, the budget proposals would result in deep cuts across the budget, cuts that would come on top of the $3.6 billion in cuts made last year.

There are increases in spending in some areas. Most (over 70 percent) of the increases are maintenance-level changes. These are changes that are due, not to the creation or expansion of new programs, but to just adjusting to changing costs. When the Governor signed a balanced budget into law last year, it included assumptions about the number of people who would need health care coverage, the number of kids who would be enrolled in schools, the price of providing various services, and so on. Some of those assumptions turned out to be incorrect, primarily because the economic outlook has been worse than expected. Adjusting for those changes is generally considered as part of the maintenance-level budget and is not considered budget cuts or increases.

Aside from the maintenance budget changes, there are modest spending increases in both budgets. The largest items include a mandated correction in how the state calculates clinic reimbursements and reversals of cuts to nursing homes and adult day health in response to lawsuits. The Times article points out one of the few areas where budget changes represent a significant change in the state’s commitments: sending unemployed workers to train at colleges for jobs in high-demand fields. This is spending that is both badly needed and woefully inadequate when compared to the demand. That’s a policy choice, but one that’s hard to argue with.

The bottom line is that neither the federal dollars nor the revenue increases are enough to fully offset the effects of the Great Recession. However, these sources of funding will help stave off other disastrous cuts such as those contained in the Governor’s first budget – the ones she said she didn’t have the conscience to adopt.

Update: Comparison of Revenue Proposals

andyn — 2010-03-16T23:19:15Z

Both chambers of the State Legislature have now passed revenue measures needed to maintain basic public services like health care and education while the economy recovers.

While these packages are an important step toward addressing our economic problems, both are insufficient given the scale of the current crisis. The current Senate proposal would generate about $890 million in new resources while the House proposal would increase revenues by $680 million -- $70 million less than the earlier version approved by the House Finance Committee. It's important to note that even under the larger Senate proposal, revenue increases would account for only 10 percent of total actions taken to close the $11.7 billion shortfalls in the FY2009-11 biennium.

The proposals

The Senate approved its proposal, SB 6143, last Sunday (March 7th). Last night, the House passed a completely different version of SB 6143. The table below provides an overview of the Senate and House proposals. To view a pdf of the table, click here.

Common Elements

Both versions of SB 6143 would limit or eliminate large exemptions and loopholes. These include: Repealing the direct sellers' B&O exemption and retroactively fixing the Dot Foods case; adopting economic nexus (for more information see the schmudget post "What is 'Economic Nexus' and Why Do I Care?");giving DOR greater authority to reign-in abusive tax avoidance transactions; repealing the sales tax exemption on bottled water; and repealing a number of smaller exemptions and preferential tax rates. Both measures would also increase the cigarette tax, though the House version would raise more money by increasing taxes on other tobacco products as well.

Senate Proposal

The Senate proposal would raise a total of $890 million. In addition to the exemptions and loopholes in common with the House version, the Senate proposal includes two temporary general tax increases: a 0.3 percentage point increase in the state sales tax ($313 million); and a 0.25 percentage point increase in the B&O tax rate applied to service industries ($170 million).

The Senate measure also includes the Working Families Tax Rebate (WFTR) - a rebate program for lower-and moderate-income families based on the Federal EITC. (For more information on the WFTR, click here.) Along with a number of smaller actions, the Senate proposal would also extend the sales tax to include coal used at coal-fired electricity facilities.

House Proposal

Overall, the House approach would generate about $682 million in new revenues in FY2011. The current House proposal relies heavily on limiting or eliminating tax exemptions and preferences such as capping a deduction claimed by banks on interest earnings from first home mortgages. It would also extend the sales tax to include candy and custom software, and would repeal the exemption for nonresident shoppers. The measure does not include any general sales tax or B&O tax increases -- a key difference with the Senate proposal.

The House version of SB 6143 largely resembles HB 3191 -- the revenue package that was passed by the House Finance Committee on March 2nd. The new proposal contains a few important differences with HB 3191, however. Unlike the earlier version, the current House proposal would not limit the B&O exemption on investment earnings from nonfinancial firms. Nor would it extend the sales tax to janitorial services. While the new version partially compensates for these omissions by expanding the scope of services subject to the B&O surtax, the current House proposal would raise about $70 million less than the earlier measure.